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Tuesday, June 30, 2009

Why Federal Bank – Catholic Syrian Bank Merger is Bad For Both

With reports coming in about the proposed merger of Federal Bank and Catholic Syrian Bank (CSB), the big question in the minds of public stakeholders – both investors & employees - of both banks is who needs such a merger.

Not a MergerThough touted as a merger, there is no doubt that this is going to be a buyout of the Thrissur-headquartered Catholic Syrian Bank (CSB) by Federal Bank. Because, profit-wise, Catholic Syrian Bank is less than one-tenth the size of Federal Bank. However, this is not a distress sale, or a purchase motivated by any banking regulators. That means, the main motivation for the move is from some Directors in the Board of Aluva-based Federal Bank. But why?

Branch Network OverlapFirstly, both banks mainly operate in the same field – Kerala, and some cities of South India. Federal Bank has 615 branches against CSB’s 375. They have similar branches – often nearby to each other – in the same villages, towns, & cities. In other words, a serious overlap of branch networks. For either bank, a tie-up with another with a different geographical spread would be the ideal thing. In fact, Federal Bank was trying for long to find such a match in North, West, or East India.

Catholic Syrian Bank’s Weak FundamentalsSecondly, CSB is not at a hot-buy as it has so many negatives – it hasn’t completed core banking implementation, it is not a listed company, and is generally looked upon as a not very professional setup. In fact, not many – except for Federal Bank - have come up to buy Catholic Syrian Bank’s largest shareholder Surachan Chawla’s 21% stake in the bank for more than an year now, despite an RBI directive for this NRI to sell to a domestic investor as soon as possible.

Overvaluing Catholic Syrian BankThirdly, CSB is reportedly asking for a huge price – estimates vary between 1.25 to 2 Federal shares for 1 Catholic Syrian Bank share – in lieu of Federal retaining its name in the combined entity and Catholic Syrian Bank losing its name entirely. This has been a sticky issue with Kerala’s Catholic Syrian Church, CSB’s original promoter, and still an influential minority shareholder. In other words, Federal is seriously overvaluing CSB to get over such hurdles.

Employee DissatisfactionThe employees of both banks are also not happy with the move, with Federal employees fearing fewer avenues for promotion, and Catholic Syrian Bank employees panicking about job losses. Such fears are valid since the branch network overlap will make many branches and employees on both sides redundant. Catholic Syrian Bank Officers Federation led by Jose Antony has already approached RBI to block the merger move.

Federal Bank Too is LethargicLastly, for CSB shareholders too, Federal is not such a good buyer. The efficiency of Federal Bank is questionable since its total annual business of less than Rs. 55,000 crore is tiny compared with its net worth. For example, excess capital is restricting Federal’s Return on Equity (RoE) to just 13%.

Business EthicsFederal Bank’s business ethics is also questionable, a point which came to light when Gujarat’s State Dispute Redressal Commission (SDRC) recently charged Federal Bank with unfair trade practice for revising upwards the fixed interest rates of 58 long-term housing loans. Federal had attracted these floating-rate customers from ICICI & HDFC promising a fixed-rate, but later revised it upwards.

Federal Bank’s Foreign IdentityFederal Bank is also facing another hurdle ever since the new FDI guidelines came into effect in February. Reserve Bank of India has pointed out that under these guidelines Federal Bank should be classified as a foreign-owned bank as its foreign ownership is now 50% or more.